Capital Gains - for developers..

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From: Paul Guest


To those "in the know", your advice would be appreciated.

A friend of mine has held a property since 1981. He has since obtained permits for a number of townhouses.

If he sells the land as it is, it is CGT-free (pre-1987 purchase).

BUT if he value-adds the land by developing the townhouses, subdividing and THEN selling them individually, are the profits over and above the current land value also tax free?

Thanks in advance,

Paul.
 
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Reply: 1
From: Mike .


Hi Paul,

I'm certainly not in the know but my conclusions are drawn from research on the ATO website.
So seek a private ruling or accountant's advice before acting.

It appears that subdividing a parcel of land into smaller blocks/lots splits the asset into separate assets but the splitting is not a CGT event so no CGT liability for subdivision as ownership hasn't changed.

Each townhouse erected is treated as a separate asset and if contracted after Sept '85 is liable for CGT upon sale.

So, IMHO,the answer to your question is subdivide the land first, have land revalued for cost base purposes. This new value is CGT exempt. Any profits over and above this are taxable.

Regards, Mike

For further research link to these pages on the ATO website:

http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19360027/160ZZT'#160ZZT
http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19360027/160ZZT'#160ZZT(1)(c)
http://law.ato.gov.au/atolaw/view.htm?locid='CGD/TD7/NAT/ATO
http://law.ato.gov.au/atolaw/view.htm?basic=+land%20CGT&&docid=CGD/TD7A/NAT/ATO/00001
http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19970038/108-70'#108-70(2)
http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19970038/108-70'#108-70(3)
http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19970038/112-25'#112-25


http://law.ato.gov.au/atolaw/view.htm?basic=+land%20CGT&&docid=CGD/TD7/NAT/ATO/00001

CGT» Determination Number 7

Capital Gains: What are the «CGT» consequences of sub-dividing pre-«CGT» «land»?


1. Where pre-«CGT» «land» is sub-divided after 19 September 1985 the «land» will maintain its pre-«CGT» acquisition date because there is no change in ownership.

2. In such cases, sub-section 160P(6) may have application.
Note : Profits from the sub-division may be taxed as ordinary income .

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http://law.ato.gov.au/atolaw/view.htm?locid='PAC/19360027/160P'#160P(6)

160P(6) Capital improvement to chattels, land or building

Where:

(a) an asset (other than a periodic roll-over asset) acquired by a taxpayer before 20 September 1985 has been disposed of on or after that date;
(b) an improvement of a capital nature to the asset was made after the taxpayer acquired the asset;
(c) if the improvement were a separate asset from the asset to which it was made:
(i) the improvement would be taken for the purposes of this Part to have been acquired by the taxpayer on or after 20 September 1985; and
(ii) subject to section 160Q, the indexed cost base to the taxpayer of the improvement would exceed $50,000; and
(d) the amount of the indexed cost base referred to in subparagraph (c)(ii) exceeds 5% of the consideration in respect of the disposal of the asset to which the improvement was made;
the improvement shall be deemed for the purposes of this Part to be an asset separate from the asset to which the improvement was made.
 
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From: Paul Guest


Thanks Mike, great help!

regards,


Paul, the 'Humble' property developer..
 
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